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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-30 · 180 added, 162 removed, 183 unchanged (65% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a generative AI drug creation company harnessing deep learning and synthetic biology to expand the therapeutic potential of proteins.

We leverage our Integrated Drug Creation platform to identify novel drug targets and create encouraging biotherapeutic candidates.

We believe our approach enables us, and our partners, to develop novel biologics that are optimized for many traits at disruptive speed.

We couple our powerful deep learning AI models, built to understand and predict determinants of protein function, with our proprietary synthetic biology capabilities, which include high-throughput single-cell assays that can evaluate billions of drug sequence variants, each within its production cell line, for target binding affinity, protein quality, and production level (titer).

Absci is a data-first generative AI drug creation company that combines AI with scalable wet lab technologies to create better biologics for patients, faster.

With the data to train, the AI to create, and the wet lab to validate, our Integrated Drug Creation platform aims to engineer better biologics with design-in functionality and best-in-class properties.

Antibody-based therapeutics represent an extraordinary medical and economic opportunity, yet the biopharmaceutical industry faces significant challenges in bringing these life-changing medicines to patients.

Our Integrated Drug Creation platform is designed to improve upon traditional biologic drug discovery by using AI to simultaneously optimize multiple drug characteristics that may be important to development and therapeutic benefit.

This has the potential to significantly shorten time to clinic and increase the probability of success.

Our approach expands the possibilities in biopharmaceuticals — shifting from a paradigm of drug discovery to drug creation — with the goal of bringing best-in-class and first-in-class antibody therapeutics to the patients who need them.

Generative AI depends on massive training datasets to generate quality results.

For example, GPT-4, a well-known generative AI model, was trained on data at scale readily available through public sources such as the internet.

Such a data set does not exist for drug discovery.

For this reason, current AI drug discovery mainly focuses on small-molecule drugs.

Their simpler structure allows the synthesis and screening of million-member chemical libraries, which can then provide training data for generative AI models.

In contrast, using AI models to design biologic drugs is more challenging because the existing biological datasets are much smaller, meaning there is less training data available for developing highly predictive AI models.

Biologic drugs, however, are inherently more selective than small molecules and hence have in general better safety profiles in patients.

Hence, building large training data sets for biologic drugs interactions offers the potential for AI models to design highly specific, safe therapeutics for a wide variety of disease targets less addressable by small molecules.

Our AI models accelerate the design and optimization of antibody candidates with potentially novel, best-in-class attributes.

We then use our proprietary wet lab assays to validate those antibody candidates at scale.

This combination of in silico modeling with wet lab testing allows us to generate immense real-world datasets that we harness to train and refine our deep learning models.

These models guide our protein and cell line designs and enable in silico optimization of multiple attributes.

Our target platform technology (formerly “Totient”) uses machine learning computational methods to evaluate patient tissue samples and, without biological bias, identify disease-relevant fully human antibodies and their disease- and tissue-specific molecular targets.

In addition to the direct utility of these antibodies and targets as drug discovery assets, these data comprising antibody-epitope recognition elements expand our AI models’ training sets and may improve predictive capabilities for future discovery campaigns.

Through iterative AI predictions, wet lab validation, and AI training we enable a virtuous cycle that we believe will accelerate us toward fully in silico biologic drug discovery.

Our unique Integrated Drug Creation approach has the potential to significantly shorten preclinical development timelines and expand therapeutic possibilities.

Our goal is to become the technology leader in biologic drug creation.

Our business model is to use our platform for the rapid creation of biologic drug candidates by:

Establishing partnerships with stakeholders in the drug development life cycle:

We develop drug candidates for partners, including those who are responsible for preclinical and clinical testing of biologics generated by our platform.

Our partnerships will provide us with the opportunity to participate in the future success of the biologics generated utilizing our platform, through potential clinical, regulatory and commercial milestone payments as well as royalties on net sales of approved products.

We aim to assemble economic interests in a diversified portfolio of partners’ biologics across multiple indications.

Developing our own drug discovery pipeline:

We intend to develop drug candidates for our own drug discovery pipeline.

With the ability to find both targets and lead candidates, we intend to develop promising lead candidates to up to the investigational drug application IND stage or later.

This will increase the value of our assets and serve as further validation of our platform.

We may enter into clinical trials and/or manufacturing partnerships to advance a lead candidate.

Total revenue was $5.7 million for the year ended December 31, 2022, respectively, compared to $4.8 million for the year ended December 31, 2021, due to timing of project-based milestones achieved and the mix of ongoing programs utilizing our Integrated Drug Creation platform.

Throughout 2021 and 2022, we have continued making investments in our operating capacity which has enabled us to achieve additional project-based milestones in our technology development and partnership agreements.

Since our inception in 2011, we have devoted substantially all of our resources to research and development activities, including with respect to our Integrated Drug Creation platform, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these activities.

As a result, we have incurred net losses in each year.

For the years ended December 31, 2022 and 2021, we incurred net losses of $104.9 million and $101.0 million, respectively.

Research and development expenses increased by $14.3 million, or 32%, for the year ended December 31, 2022 compared to the year

ended December 31, 2021.

With the data to learn, the AI to create, and the wet lab to validate, Absci can create billions of antibody designs and screen millions of ranked antibody sequences in weeks, allowing us to go from AI-designed antibodies to wet lab-validated candidates in as little as six weeks.

Our unique Integrated Drug Creation approach has the potential to significantly shorten preclinical development timelines from 5-7 years in benchmarked timelines to 18-24 months, enabling us to build a strong pipeline of both partnered and wholly-owned candidates that can expand therapeutic possibilities.

Our business model is to use our platform for rapid creation of biologic drug candidates by:

Establishing partnerships with stakeholders in the drug discovery and development life cycle:

We create drug candidates with partners, including pharmaceutical and biotechnology companies who are responsible for preclinical and clinical testing of biologic candidates generated through our platform.

Our partnerships will provide us with the opportunity to participate in the future success of the biologic candidates generated utilizing our platform, including through potential clinical, regulatory and commercial milestone payments as well as royalties on net sales of approved products.

We aim to assemble economic interests in a diversified portfolio of partnered pipeline assets of biologics across multiple indications.

Developing our own proprietary asset pipeline:

We aim to create therapeutic assets comprising our own internal program pipeline.

With the ability to find targets and develop potential best-in-class

assets, we intend to develop promising assets to value inflection points, anywhere from preclinical validation through clinical trials, before partnering or selling them.

We may enter into clinical trials and/or manufacturing partnerships to advance specific therapeutic assets to target such value inflection points.

We believe that by developing our own pipeline, we will create optionality for enhanced monetization and validation of our platform.

Our evolving business model is underpinned by a strategic shift towards diversifying our program portfolio through both partnered drug creation programs and internal asset development programs.

Our approach is to balance the portfolio between partnered programs that broaden our reach into various indications and provide R&D and upfront funding, and internal programs for which we have more control and the potential for partnerships or asset sales that provide more significant economic returns.

The cornerstone of this business model evolution lies in the diversification of risk and potential return on investment.

Engaging in drug creation partnerships may enable us to reach broader indications and markets, whereas internal asset development may be more advantageous in terms of greater control over program selection, development timeline, and return on investment.

Our dual-faceted model not only secures a focused set of indications but also gives us greater optionality, enhancing our ability to pivot and adapt as the programs progress.

We believe we will grow and diversify our portfolio of programs through our model, ultimately driving innovation and delivering value for all stakeholders.

Total revenue was $5.7 million for the years ended December 31, 2023 and 2022, which included an increase in technology development revenue of $1.2 million due to timing of project-based milestones achieved and the mix of ongoing programs utilizing our Integrated Drug Creation platform and a decrease in collaboration revenue of $1.2 million due to completion of our collaboration program in 2022.

For the year ended December 31, 2023 we incurred a net loss of $110.6 million, which includes a non-cash goodwill impairment charge of $21.3 million.

Research and development expenses decreased by $10.8 million, or 18%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

As of December 31, 2023, we had an accumulated deficit of $406.5 million and cash and cash equivalents and short-term investments totaling $97.7 million.

Prior to our initial public offering (IPO), we financed our operations primarily through private placements of redeemable convertible preferred stock and convertible notes.

From the date of our company formation up to the IPO, we had raised aggregate gross proceeds of $230.0 million.

In July 2021, we consummated our IPO and issued 14,375,000 shares of common stock, including a full exercise of the overallotment option, for net proceeds of $210.1 million , after deducting underwriting discounts and offering related expenses.

We expect to continue to incur significant expenses in connection with our ongoing activities, including as we:

• implement an effective business development strategy to drive adoption of our Integrated Drug Creation platform by new and existing partners;

• continue to engage in research and development efforts and scale our technology development activities to meet potential demand at a reasonable cost;

• develop our internal proprietary asset pipeline of lead drug candidates;

• continue to engage in research and development efforts and scale our drug creation activities to meet potential demand at a reasonable cost;

• develop, acquire, in-license or otherwise obtain technologies that enable us to expand our platform capabilities;

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• implement operational, financial and management information systems.

• continue to operate as a public company.

In September 2023, we announced a plan to realign internal investments and operations to further focus on and allocate resources to our internal pipeline of drug creation programs and our Integrated Drug Creation platform.

In connection with this decision, we announced a reduction in our global workforce of 15%.

Our corporate headquarters and primary research and development facilities are located in Vancouver, Washington in a 77,974 square foot facility that includes general administrative office space and laboratory space.

Our AI Research Lab is located in New York, New York and our Innovation Center is located in Zug, Switzerland.

Additionally, we have research and development presence in Belgrade, Serbia.

We believe our facilities are adequate and suitable for our current needs and that should it be needed, suitable additional or alternative space will be available to accommodate our operations.

Additionally, we have a research and development presence in Belgrade, Serbia.

Key Factors Affecting Our Results of Operations and Future Performance

We believe that our future financial performance will be primarily driven by multiple factors as described below, each of which presents growth opportunities for our business.

These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.

These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of

Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described in the section of this Annual Report titled “Risk Factors”.

• Establish new partnerships:

Our potential to grow revenue and long-term earnings will require us to successfully identify and establish technology development arrangements with new partners.

We have been expanding and expect to continue to expand our business development team and our capabilities to find new partners.

Our potential to grow revenue and long-term earnings will require us to successfully identify and establish drug creation arrangements with new partners.

• Increase the number of programs under existing partnerships:

The execution of our long-term strategy relies substantially on the value our partners believe can be recognized from our programs.

Our continued growth depends on our ability to expand the scope of our existing partnerships and add new molecules for Discovery or CLD partnerships with current partners.

• Successfully complete our technology development activities and enter licensing arrangements with our partners:

Our continued growth depends on our ability to expand the scope of our existing partnerships and add new molecules for drug creation partnerships with current partners.

• Create our proprietary asset pipeline.

We are in the process of selectively creating our own lead drug candidates and intend to advance them up to value inflection points anywhere from preclinical validation through clinical trials.

In some cases we may out-license or transfer drug candidates for clinical advancement by a partner, with the expectation of a greater share in the economics relative to the milestones and royalties we may secure for our core platform technology development licenses.

• Successfully complete our drug creation activities and enter licensing arrangements with our partners:

Our business model depends upon entering into licensing arrangements with our partners to advance the drug candidates which we generate through clinical development to commercialization.

Both our ability to successfully complete technology development activities to meet the needs of a partner, and the partner’s prioritization of the subject program, impact the likelihood and timing of any election by a partner to enter into a licensing arrangement.

Both our ability to successfully complete drug creation activities to meet the needs of a partner, and the partner’s prioritization of the subject program, impact the likelihood and timing of any election by a partner to enter into a licensing arrangement.

There is no assurance that a partner will elect to license.

• Our partners successfully developing and commercializing the drug candidates generated with our technology:

Our business model is dependent on the eventual progression of biologic drug candidates discovered or initially developed utilizing our Integrated Drug Creation platform into

clinical trials and commercialization.

Given the nature of our relationships with our partners, we do not control the progression, clinical development, regulatory strategy, public disclosure or eventual commercialization, if approved, of these product candidates.

As a result, our future success and our potential eligibility to receive milestone payments and royalties are entirely dependent on our partners’ efforts over which we have no control.

Our business model is dependent on the eventual progression of biologic drug candidates discovered or initially developed utilizing our Integrated Drug Creation platform into clinical trials and commercialization.

Given the nature of our relationships with our partners, we often do not fully control the progression, clinical development, regulatory strategy, public disclosure or eventual commercialization, if approved, of our partnered product candidates.

As a result, our future success and our potential eligibility to receive milestone payments and royalties are significantly dependent on our partners’ efforts over which we have no control.

The timing and scope of any approval that may be required by the U.S.

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We expect to incur significant expenses to advance these research and development efforts or to invest in or acquire complementary technologies, but these efforts may not be successful.

• Create our proprietary asset pipeline.

We intend to selectively create our own lead drug candidates and advance them up to the IND stage or later.

• Drive commercial adoption of our Integrated Drug Creation platform capabilities:

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We continue to identify key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Currently, given our stage of development, we believe that the following metrics are the most important for understanding our current business trajectory.

We believe that the following metrics are the most important for understanding our current business trajectory.

These metrics may change or may be substituted for additional or different metrics as our business develops.

For example, as our business matures and to the extent drug candidates generated with our technologies enter clinical development, or as we may enter partnerships addressing programs over multiple years, or as certain programs may be discontinued by partners, we anticipate updating these metrics to reflect such changes.

For example, as our business matures and to the extent drug candidates generated with our technologies enter clinical

development, or as we may enter partnerships addressing programs over multiple years, or as certain programs may be discontinued by partners, we anticipate updating these metrics to reflect such changes.

December 31, December 31,

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Active Programs (3)

(1) Partners represents the unique number of partners with whom we have executed technology development agreements.

(1) Partners represents the unique number of partners with whom we have executed drug creation agreements.

We view this metric as an indication of our ability to execute our business development activities and level of our market penetration.

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We view this metric as an indication of the robustness of our technology and the commercial success of our platform.

(3) Active Programs represents the number of programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical

development, as well as any program for which our partner obtains and maintains a license to our technology to advance the program after completion of the technology development phase.

There is no assurance, however, that our partners will advance any drug candidates that are currently the subject of Active Programs into further preclinical or clinical development or that our partners will elect to license our technologies upon completion of the technology development phase in a timely manner, or at all.

(3) Active Programs represents drug creation programs that are subject to ongoing technology development activities intended to determine if the program can be pursued by our partner for future clinical development, as well as any program for which our partner obtains and maintains a license to our technology to advance the program after completion of the drug creation phase.

In light of the inherent risks and uncertainties associated with drug development, we anticipate that our partners may from time to time abandon or terminate the development of one or more drug candidates generated from our platform.

As we are notified of such terminations, we will remove the subject programs from our Active Programs count.

As of December 31, 2022, we had drug candidates in 16 Active Programs across five current partners’ preclinical or clinical pipelines.

We have negotiated license agreements, or expect to negotiate license agreements upon completion of certain technology development activities, with potential downstream milestone payments and royalties for all Active Programs.

We have thirteen Active Programs comprising Discovery applications include three through our agreement with Merck & Co., Inc., three through our agreement with EQRx and seven with an undisclosed biotechnology company.

Three Active Programs are focused on developing production cell lines for drug candidates that our partners are developing.

Two of these cell line development (“CLD”) Active Programs are preclinical and one is in Phase 3 (PhaseBio Pharmaceuticals’ drug candidate, bentracimab, assumed by SFJ Pharmaceuticals, Inc.

As of December 31, 2023, our Active Programs are as follows:

Partner Contract Date Active Programs

Therapeutic Area

PrecisionLife

December 2023 5 Undisclosed

November 2023 2 Dermatology

November 2023 1 Oncology

Undisclosed July 2023

1 Undisclosed

March 2023 1 Undisclosed

January 2022 3 Undisclosed

December 2019 1 Undisclosed

Alpha Cancer Technologies

August 2019 1 Oncology

SFJ Pharmaceuticals April 2019

Total Active Programs

Our Integrated Drug Creation platform is primarily utilized in our partnerships for drug creation across indications using AI to simultaneously optimize multiple drug characteristics that may be important to development and therapeutic benefit.

One of our Active Programs with an undisclosed partner is leveraging our platform capabilities to optimize pharmacokinetic properties for a Phase II candidate and one of our Active Programs with an undisclosed partner is leveraging our platform capabilities including our antibody library.

We also have three Active Programs focused on our legacy model of developing production cell lines for drug candidates that our partners are developing.

Two of these legacy cell line development Active Programs are preclinical and one is in Phase 3 clinical development (PhaseBio Pharmaceuticals’ drug candidate, bentracimab, assumed by SFJ Pharmaceuticals, Inc.

in January 2023).

Exclusive of our 16 Active Programs with partners, we have utilized our platform to perform technology development activities related to 31 additional molecules.

These programs include both internal research programs and technology development programs with third parties intended to demonstrate our platform’s capabilities as we address successively broader ranges of biologics and modalities.

We have not transferred technology or granted licenses related to these programs.

We have not negotiated terms for a sufficient number of royalty- and milestone-bearing licenses to enable us to make accurate predictions regarding our potential revenue and financial performance.

We have negotiated license agreements, or expected to negotiate license agreements upon completion of certain drug creation activities, with potential downstream milestone payments and royalties for all Active

We have not negotiated terms for a sufficient number of royalty- and milestone-bearing licenses, however, to enable us to make accurate predictions regarding our potential revenue and financial performance.

Internal Pipeline

Our biologics pipeline reflects our differentiated capabilities in de novo antibody creation, multi-parameteric lead optimization, and reverse immunology.

We’re developing a diversified portfolio of programs with a focus on cytokine biology as we scale our Integrated Drug Creation platform and strive to impact millions of lives.

Internal Asset Programs

As of December 31, 2023, we have identified three wholly-owned internal asset programs focusing on cytokine biology as well as several undisclosed internal pipeline programs under evaluation.

Target Description

Candidate targeting TL1A in inflammatory bowel disease

Lead and optimization stage for an undisclosed therapeutic target in dermatology

Lead and optimization stage for an undisclosed therapeutic target in immuno-oncology

We are aware of clinical stage assets targeting TL1A that are being developed by Merck, Roche and Sanofi.

For purposes of comparing the anticipated attributes of ABS-101 to these competitive product candidates, we generated putative clinical competitor molecules and performed a head to head comparison against several potential ABS-101 molecules.

In these preclinical studies, ABS-101 potential candidates exhibited properties consistent with a potentially superior product profile by demonstrating equal or superior potency data from multiple biophysical and cellular assays, in addition to improved developability properties.

We believe these attributes support the program’s potential to create an efficacious candidate conducive to subcutaneous dosing.

Furthermore, in vitro and preliminary in vivo PK studies confirm the potential for extended half-life, supporting the objective for significantly improved dosing intervals.

While we are encouraged by these preclinical results, we cannot assure you that similar results will be obtained in clinical studies of ABS-101.

Additionally, while we endeavored to create molecules with the same attributes as those of competitive product candidates under development, we cannot assure you that the molecules we created are similar or better than those being developed by our competitors, nor can we assure you that direct comparisons of our clinical product candidate to those of our competitors will produce similar results.

In February 2024, we initiated IND-enabling studies to further evaluate certain properties of ABS-101.

Based on these IND-enabling studies, we plan to submit an IND in the first quarter of 2025 and potentially initiate a Phase 1 clinical trial in the first half of 2025.

Our Active Programs, internal asset programs, and historical programs demonstrate our platform’s capabilities to successively address broad ranges of biologics and modalities.

Components of Results of Operations

Our revenue currently consists primarily of fees earned from our partners in conjunction with technology development agreements (TDAs) and partnership agreements, which are delineated as technology development revenue in our results of operations.

Our revenue currently consists primarily of fees earned from our partners in conjunction with drug creation partnership agreements utilizing our integrated drug creation platform, which are delineated as technology development revenue in our results of operations.

These fees are earned and paid at various points throughout the terms of these agreements including upfront, upon the achievement of specified project-based milestones, and throughout the program.

We expect revenue to increase over time as we enter into additional partnership agreements and as our partnerships continue to include more drug discovery activities.

We expect revenue to increase over time as we enter into additional drug creation partnership agreements.

We expect revenue to increase over time as we grant licenses to our partners for the clinical and commercial use of intellectual property rights to the biological assets we create, and as the partners advance product candidates into and through clinical development and commercialization.

We expect that our revenue will fluctuate from period to period due to the timing of executing additional partnerships, the uncertainty of the timing of milestone achievements and our dependence on the program decisions of our partners.

KBI BioPharma, Inc.

Collaboration Agreement

In December 2019, we executed a four-year Joint Marketing Agreement (JMA) with KBI BioPharma, Inc.

(KBI) to co-promote technologies through joint marketing efforts.

In September 2021, the JMA was amended to shorten the term to approximately three years, ending in October 2022.

Pursuant to the JMA, we received a non-refundable upfront payment of $0.8 million and milestone and other payments of $2.6 million in the aggregate, which had been received as of December 31, 2022, upon the achievement of specific milestones.

Operating Expenses

Research and development

functions, consulting fees, equipment and allocated facility costs (including occupancy and information technology).

Research and development expenses include the cost of materials, personnel-related costs (comprised of salaries, benefits and share-based compensation) for personnel performing research and development functions, consulting fees, equipment and allocated facility costs (including occupancy and information technology).

These expenses are exclusive of depreciation and amortization.

Research and development activities consist of continued development of our Integrated Drug Creation platform, internal pipeline, target discovery and technology development for partners.

Research and development activities consist of continued development of our Integrated Drug Creation platform, internal pipeline, and drug creation for partners.

We derive improvements to our platform from each type of activity.

Research and development efforts apply to our platform broadly and across programs.

We expect research and development expenses to continue to increase in absolute dollars over the long-term as we enter into additional partnerships and continue to invest in platform enhancements.

We expect research and development expenses to increase in absolute dollars over the long-term as we enter into additional drug creation partnerships, continue to invest in platform enhancements, and develop and advance our internal asset pipeline.

Selling, general, and administrative

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We expect our selling costs to increase in absolute dollars as we continue to grow our business development efforts and increase marketing activities to drive awareness and adoption of our platform.

We expect selling costs to fluctuate as a percentage of total revenue due to the timing and magnitude of these expenses, and to decrease as a percentage of total revenue in the long term.

We expect general and administrative expenses to stabilize as we more effectively control costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the U.S.

We expect general and administrative expenses to continue to stabilize as we more effectively control costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the U.S.

Securities and Exchange Commission (SEC), director and officer insurance premiums and investor relations.

We expect these expenses to vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

Following an initial reduction due to the September 2023 realignment and resulting reduction in our global workforce, we expect these expenses to vary from period to period as a percentage of revenue in the near term, and to decrease as a percentage of revenue in the long term.

We have a comprehensive intellectual property portfolio directed towards the many aspects of our Integrated Drug Creation platform, including those related to our proprietary cell lines and protein expression technologies, non-standard amino acid technology, proprietary screening assays, antibody discovery methods, and generative AI models.

We regularly file patent applications to protect innovations arising from our research and development.

We also hold trademarks and trademark applications in the United States and foreign jurisdictions.

We also hold trademarks and trademark applications in the United States and

foreign jurisdictions.

Costs to secure and defend our intellectual property are expensed as incurred and are classified as selling, general and administrative expenses.

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We expect depreciation expense to stabilize following the completion of the build-out of our primary facility, though it may fluctuate in the future in line with continued growth and compute demands in absolute dollars if we purchase additional equipment.

Goodwill impairment

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists.

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded a full impairment charge in the amount of $21.3 million.

Other income (expense)

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Interest expense, net, consists primarily of interest related to borrowings under our term debt and financed laboratory equipment.

Prior to our initial public offering in 2021, interest expense also included convertible note interest.

Other Income (Expense)

Other income (expense) consists primarily of interest income from our investments.

Prior to our initial public offering in 2021, other income (expense) also included adjustments of our convertible notes and preferred stock warrant liability to fair value.

Other income consists primarily of interest income from our cash, cash equivalents and short-term investments.

Results of Operations

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Depreciation and amortization 13,999 13,037

Goodwill impairment 21,335 —

Total operating expenses 121,233 112,497

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Interest expense (1,010) (972)

Other income (expense), net 2,357 (31,189)

Total other income (expense), net 1,385 (34,621)

Other income, net 6,059 2,357

Total other income, net 5,049 1,385

Loss before income taxes (110,466) (105,365)

Income tax benefit 461 8,899

Income tax (expense) benefit (100) 461

Net loss $ (110,566) $ (104,904)

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Total revenues $ 5,718 $ 5,747 $ (29) (1) %

Total revenue was $5.7 million for the year ended December 31, 2022, representing an increase of approximately $1.0 million, or 20%, compared to $4.8 million for the year ended December 31, 2021.

Technology development revenue increased by $0.5 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, driven by a combination of overall program progress, the timing of project-based milestones achieved, and the mix of ongoing programs activity, most significantly the result of progress and milestone achievement associated with our Merck partnership utilizing our non-standard amino acid technology.

Collaboration revenue increased by $0.4 million, or 58%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Technology development revenue increased by $1.2 million, or 26%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by a combination of overall program progress, the timing of project-based milestones achieved, and the mix of ongoing programs activity.

Collaboration revenue decreased by $1.2 million, or 100%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

In September 2021, the JMA was amended to shorten the term to approximately three years, ending in October 2022.

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Depreciation and amortization 13,999 13,037 962 7 %

Goodwill impairment 21,335 — 21,335 100 %

Total operating expenses $ 121,233 $ 112,497 $ 8,736 8 %

Research and development

Research and development expenses increased by $14.3 million, or 32%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was generally driven by increased costs associated with increased technology development activity with our partners and increased costs associated with continued platform development.

These increased costs were primarily attributable to increased average headcount and related personnel costs in the amount of $7.0 million and increased purchases of supplies and services related to lab operations of $7.9 million specifically for our technology development agreements and internal research and platform development activities, offset by a $0.7 million decrease in facility overhead.

Research and development expenses decreased by $10.8 million, or 18%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease was primarily attributable to a decrease in laboratory operational costs of $8.0 million and a $2.8 million decrease in personnel costs, including stock-based compensation.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $11.8 million, or 41%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily driven by increased personnel costs in the amount of $3.4 million, increased stock-based compensation of $2.0 million, and increased administrative costs of $6.5 million.

The increases in the administrative expenses include professional services, insurance costs, and other expenses that are primarily the result of our operating as a public company for a full year.

Selling, general, and administrative expenses decreased by $2.7 million, or 7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease was primarily driven by decreased stock-based compensation of $1.1 million and decreased insurance and other administrative costs of $2.2 million.

Depreciation and amortization

Depreciation and amortization expense increased by $1.0 million, or 7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to the increased purchases of lab equipment necessary to complete our increased level of technology development agreements and research and development, purchases of property, equipment, and leasehold improvements related to our new corporate headquarters, and the amortization of intangible assets acquired in 2021.

The increase was primarily due to a full year of depreciation for the year ended December 31, 2023 on leasehold improvement additions in 2022.

Goodwill impairment

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded an impairment charge in the amount of $21.3 million during the second quarter.

Goodwill and intangibles, net to our consolidated financial statements in this Annual Report on Form 10-K for further discussion.

Other income (expense)

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Interest expense $ (1,010) $ (972) $ (38) 4 %

Other income (expense), net 2,357 (31,189) 33,546 (108) %

Total other income (expense), net $ 1,385 $ (34,621) $ 36,006 (104) %

Other income, net 6,059 2,357 3,702 157 %

Total other income, net $ 5,049 $ 1,385 $ 3,664 265 %

Interest expense

Interest expense was $1.0 million for the year ended December 31, 2022 compared to $3.4 million for the year ended December 31, 2021, representing a decrease of $2.4 million, or 72%.

During the year ended December 31, 2021, we recognized interest expense related to the convertible promissory notes issued in March 2021.

These notes converted into common stock in connection with the IPO in July 2021, resulting in decreased interest expense for the year ended December 31, 2022.

Other income (expense), net

Other income (expense), net , was $2.4 million income for the year ended December 31, 2022 compared to $31.2 million expense for the year ended December 31, 2021, representing a change of $33.5 million, or 108%.

For the year ended December 31, 2021, other income included the adjustment of the fair value of our convertible notes for $28.0 million, and the change in the preferred stock warrant liability’s fair value in the amount of $4.1 million, offset by recognition of a gain on extinguishment for the forgiveness of our Payroll Protection Plan loan in the amount of $0.6 million.

For the year ended December 31, 2022, other income primarily included interest income.

Interest expense was $1.0 million for the years ended December 31, 2023 and 2022, remaining consistent between periods.

Other income, net

Other income, net , was $6.1 million income for the year ended December 31, 2023 compared to $2.4 million income for the year ended December 31, 2022, representing a change of $3.7 million, or 157%, primarily attributable to increases in investment income from cash, cash equivalents and short-term investments.

Liquidity and Capital Resources

As of December 31, 2022, we had $164.4 million of cash and cash equivalents and short-term investments.

As of December 31, 2023, we had $97.7 million of cash,cash equivalents and short-term investments.

We have incurred net operating losses since inception.

As of December 31, 2023, our accumulated deficit was $406.5 million.

To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our technology development agreements.

We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the successful preclinical and clinical development by our partners of product candidates generated using our Integrated Drug Creation platform and the successful commercialization by our partners of any such product candidates that are approved.

To date, we have funded operations through issuances and sales of equity securities and debt, in addition to revenue generated from our drug creation agreements.

We believe that our cash, cash equivalents and short-term investments will be sufficient to meet our operating expenses, working capital and capital expenditure needs over at least the next 12 months following the date of this filing.

Our future capital requirements will depend on many factors, including, but not limited to our ability to raise additional capital through equity or debt financing, our ability to successfully secure additional partnerships under contract with new partners and increase the number of programs covered under contracts with existing partners, the successful preclinical and clinical development by our partners of product candidates generated using our Integrated Drug Creation platform, the successful commercialization by our partners of any such product candidates that are approved, and the progress of any IND-enabling studies for our internal program assets.

If we are unable to execute on our business plan and adequately fund operations, or if our business plan requires a level of spending in excess of cash resources, we may be required to negotiate partnerships in which we receive greater near-term payments at the expense of potential downstream revenue.

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Since our inception, we have financed our operations primarily from the issuance and sale of our redeemable convertible preferred stock, issuances of equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash flow from operations.

Redeemable convertible preferred stock

Prior to our IPO in July 2021, we had raised a total of $104.3 million from the issuance of redeemable convertible preferred stock, net of issuance costs, which included shares of Series E redeemable convertible preferred stock for net proceeds of $4.9 million in February 2021 .

Immediately prior to our IPO in July 2021, all convertible preferred stock was converted into an aggregate of 46,266,256 shares of common stock.

Bridge Bank Loan and Security Agreement

In June 2018, we entered into a Loan and Security Agreement (LSA) with Bridge Bank (Bank), a di vision of Western Alliance Bank .

We initially borrowed the first tranche of $0.3 million in June 2018.

We increased our borrowings to $3.0 million in March 2019, and to $5.0 million in May 2020.

The loan was to mature in May 2022, at which time all outstanding principal and accrued and unpaid interest would have been due and payable.

In June 2021, we entered into a fifth amendment to the LSA.

This amendment modified the term loan’s maturity date to June 16, 2023.

This loan was secured by substantially all our tangible assets;

intellectual property were excluded from this secured collateral, but was subject to a negative pledge in favor of Bank.

In June 2022, we paid off the remaining outstanding balance of $2.4 million of the LSA, which terminated the LSA and extinguished all of our obligations therein.

Convertible notes

In March 2021, we issued $125.0 million aggregate principal amount of convertible notes to certain existing and new investors.

In July 2021, the convertible notes converted into an aggregate of 9,732,593 shares of common stock immediately prior to our IPO, at a price per share calculated based on 82% of the IPO price of $16.00.

Initial public offering

In July 2021, we completed our IPO and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.00 per share and received net proceeds of $210.1 million from the IPO.

In July 2021, we completed our initial public offering (IPO) and issued 14.4 million shares of our common stock, including 1.9 million shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.00 per share and received net proceeds of $210.1 million from the IPO.

Equipment financing

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The Shelf Registration Statement was declared effective by the SEC on September 2, 2022.

To date, we have not issued any securities or received any proceeds from the sale of any securities registered pursuant to the Shelf Registration Statement.

On June 16, 2023, we entered into a Sales Agreement with Cowen and Company, LLC, as Sales Agent, with respect to an “at the market offering” program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Sales Agent.

We will pay the Sales Agent a commission up to 3.0% of the gross sales proceeds of any shares sold under the Sales Agreement.To date, we have not issued any securities or received any proceeds from the sale of any securities registered pursuant to the Sales Agreement.

There can be no assurance that any financing will be available on terms acceptable to us.

On March 1, 2024, the Company closed the sale of an aggregate of 19,205,000 shares of its common stock, pursuant to an underwriting agreement with Morgan Stanley & Co.

LLC and Cowen and Company, LLC at a public offering price of $4.50 per share, before underwriting discounts and commissions.

The total estimated net proceeds to the Company from the offering are expected to be approximately $80.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

The following summarizes our cash flows (In thousands):

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Financing activities (4,483) 5,237

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (203,084) $ 208,218

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 12,825 $ (203,084)

Cash flows from operating activities

In the year ended December 31, 2023, net cash used in operating activities was $64.6 million and consisted primarily of a net loss of $110.6 million adjusted for non-cash items, including depreciation and amortization expense of $14.0 million, stock-based compensation of $11.4 million, goodwill impairment of $21.3 million, and a net decrease in operating assets and liabilities in the amount of $1.5 million.

In the year ended December 31, 2022, net cash used in operating activities was $81.3 million and consisted primarily of a net loss of $104.9 million adjusted for non-cash items, including depreciation and amortization expense of $13.0 million, stock-based compensation of $12.5 million, and a net increase in operating assets and liabilities in the amount of $1.5 million.

In the year ended December 31, 2021, net cash used in operating activities was $60.6 million and consisted primarily of a net loss of $101.0 million adjusted for non-cash items, including depreciation and amortization expense of $6.7 million stock-based compensation of $10.6 million, an increase to our convertible note liability of $30.7 million, an increase to our preferred stock warrant liability of $4.1 million, and a net increase in operating assets and liabilities in the amount of $3.1 million.

Cash flows from investing activities

In the year ended December 31, 2022, net cash used in investing activities was $127.0 million.

The net cash used resulted primarily from purchases of short-term investments of $108.6 million, purchases of lab equipment of $16.2 million, and cash paid as part of our acquisition of Totient of $8.0 million, partially offset by cash provided by maturities of short-term investments of $5.0 million.

In the year ended December 31, 2021, net cash used in investing activities was $67.4 million primarily from purchases of lab equipment and leasehold improvements of $38.0 million, cash paid as part of our acquisitions of Denovium and Totient of $28.1 million and an investment in equity securities of $1.2 million.

In the year ended December 31, 2023, net cash provided by investing activities was $81.9 million.

The net cash provided resulted primarily from maturities of short-term investments of $229.9 million, partially offset by cash used for purchases of short-term investments of $147.3 million and purchases of lab equipment of $0.9 million.

In the year ended December 31, 2022, net cash used in investing activities was $127.0 million primarily from purchases of short-term investments of $108.6 million, purchases of lab equipment of $16.2 million as we expanded our operations and overall capacity and cash paid as part of our acquisition of Totient, Inc.

of $8.0 million, partially offset by cash provided by maturities of short-term investments of $5.0 million.

Cash flows from financing activities

In the year ended December 31, 2022, net cash provided by financing activities was $5.2 million.

The net cash provided resulted primarily from new equipment financing agreements of $12.0 million, partially offset by cash used for principal payments of $7.5 million made for financed equipment and long-term debt.

In the year ended December 31, 2021, net cash provided by financing activities was $336.2 million.

The net cash provided resulted primarily from total net proceeds of $210.1 million from the IPO, the issuance of $125.0 million of convertible promissory notes and Series E redeemable convertible preferred stock, net of issuance costs, in the amount of $4.9 million, partially offset by principal payments made for financed equipment and long-term debt in the amount of $4.1 million.

Our effective income tax rate from continuing operations was 0.4% and 8.1% for the years ended December 31, 2022 and 2021, respectively.

In the year ended December 31, 2023, net cash used in financing activities was $4.5 million.

The net cash used resulted primarily from principal payments of $5.3 million made for financed equipment, partially offset by proceeds from the issuance of common stock of $0.9 million from stock option exercises and our 2021 ESPP.

In the year ended December 31, 2022, net cash provided by financing activities was $5.2 million primarily from proceeds from equipment financing agreements of $12.0 million and proceeds from the issuance of common stock of $0.7 million, partially offset by cash used for principal payments of $7.5 million made for financed equipment and long-term debt.

Our effective income tax rate from continuing operations was (0.1)% and 0.4% for the year ended December 31, 2023 and 2022, respectively.

The difference between the effective rate and the statutory rate is primarily attributed to the change in the valuation allowance against net deferred tax assets.

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While our significant accounting policies are described in more detail in Note 2:

Summary of Significant Accounting Policies to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Summary of significant accounting policies, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

Long-lived asset impairment

We tested long-lived assets for recoverability as of June 30, 2023 by comparing the estimated future cash flows (on an undiscounted basis) to be generated from the use and residual value of the entity wide asset

group to its carrying value and concluded that the long-lived assets were not impaired.

For details regarding the interim impairment assessment performed for long-lived assets see Note 6:

Goodwill and intangibles, net.

Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, or sooner if an indicator of impairment exists.

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Assumptions are subject to change as a result of changing economic and competitive conditions.

Based on our assessment in the fourth quarter of the fiscal year ended December 31, 2022 using the qualitative approach, we concluded that the fair value of the reporting unit exceeded the carrying value and that there was no impairment of goodwill.

We performed a quantitative impairment evaluation of goodwill as of June 30, 2023 and recorded an impairment charge of $21.3 million reported as goodwill impairment on the consolidated statement of operations and comprehensive loss.

For details regarding the impairment assessments performed for goodwill see Note 6:

Goodwill and intangibles, net.

Revenue recognition

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We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.

Technology development revenue includes revenue associated to the discovery, development and technology readiness phases of technology development and partnership agreements.

Technology development revenue includes revenue associated to the discovery, development and technology readiness phases of drug creation agreements.

We refer to our customers as “partners” when describing our relationship in an agreement.

Technology development revenue

Our TDAs generally include multiple phases of Discovery and/or CLD;

such as target discovery, library design, assay development, strain screening, fermentation optimization, purification, and analytics that typically all represent a single performance obligation.

Our drug creation agreements generally include multiple stages of drug creation that combined represent a single performance obligation.

The primary goal of the drug creation phase includes target creation, lead or candidate creation, and development or optimization of a lead candidate or set of lead candidates.

For the drug creation phase partners may request a scope that includes, but is not limited to:

a specified disease area, a target for creation of a new biologic, or supply a specified lead candidate for AI-driven optimization.

These agreements may include options for additional goods and services such as readying the technology to transfer to the partner and licensing terms.

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This method provides an appropriate depiction of completed progress toward fulfilling our performance obligations for each respective arrangement.

In certain TDAs that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Business combinations

We utilize the acquisition method of accounting for business combinations and allocate the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

We primarily establish fair value using the replacement cost approach or the income approach based upon a discounted cash flow model.

The replacement cost approach measures the value of an asset by the cost to reconstruct or replace it with another of like utility.

The income approach requires the

use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates.

Other estimates include:

• The use of carrying value as a proxy for fair values of fixed assets and liabilities assumed from the target;

• Fair values of intangible assets and contingent consideration.

While we use best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, these estimates and assumptions are inherently uncertain and subject to refinement.

As a result, during the purchase price measurement period, which is no more than one year from the business acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

We recorded adjustments during the year ended December 31, 2021 related to our Totient acquisition.

Business combinations also require us to estimate the useful life of certain intangible assets acquired and this estimate requires significant judgment.

Stock-based compensation

Stock-based compensation includes compensation expense for restricted stock and stock option grants to employees and is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period.

The fair value of options to purchase common stock are measured using the Black-Scholes option-pricing model.

We account for forfeitures as they occur.

Stock-based compensation to our financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options.

Certain of such assumptions involve inherent uncertainties and the application of significant judgment.

As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.

In certain drug creation agreements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.

Contingent Consideration

We utilized the acquisition method of accounting for our business combination related to the Totient acquisition which included allocating the purchase price of the acquisition to the various tangible and

intangible assets acquired and liabilities assumed based on their estimated fair values.

The contingent consideration of $15.0 million held in escrow is included in restricted cash on the consolidated balance sheets.

The contingent consideration shall be paid upon the achievement of the milestone of either entering into agreements meeting certain financial criteria with third parties using, or relating to, Totient technology or the first commercial sale of a Totient product.

We utilize a probability-weighted approach to estimate the fair value of the liability included in accrued expenses on the consolidated balance sheets.

Changes in fair value of the contingent consideration liability are included within research and development expense on the consolidated statements of operations and comprehensive loss.

Emerging Growth Company Status

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As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements, including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements, known as the auditor discussion and analysis.

We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more;

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or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis